Question

Suppose market price is currently stable at a level of $200, and at that level, 500 units are sold. Today, because of some unforeseen outside event, the market price has dropped $20 to $180. Question 1 My good friend Joe tells me that consumer surplus has increased by $10,000. Is he right? Do we have enough information to answer this question? Consider sloping demand curve D0

Question 2

Let's return to our original situation, but we are going to add a supply curve (S_{0}S0 ), which would support the market equilibrium of 500 units purchased at a price of $200 per unit.

Question 2

Let's return to our original situation, but we are going to add a supply curve (S_{0}S0 ), which would support the market equilibrium of 500 units purchased at a price of $200 per unit.

1 So $600 $200 Do C F 500 1200Q

Given the graph above, which combination of lettered areas makes up consumer surplus (CS), if any? Which combination of lettered areas makes up producer surplus (PS), if any? Can you calculate the size of social gain (the sum of PS and CS)? If so, what is that value?

Answer 1

CS = Area A = 1/2 (600 - 200) (500) = 1/2 times 300 times 500 = 75,000 PS = Area B = 1/2 (200 - 0)(500) = 1/2 times 200 times 500 = 50,000 TS = A + B = CS + PS = 75000 + 50000 = 125,000